In March, Penn received a vote of unusual confidence from Wall Street: the University sold $300 million worth of bonds that won’t come due for another 100 years. Bearing an interest rate of 4.674 percent, the century bonds set a record for cheap financing. Prior to the sale—which attracted sufficient demand for Penn to bump up its initial $250 million issue—no borrower in history had paid less than 4.7 percent for 100-year debt. (The record still stood at press time.)
According to Stephen D. Golding, the University’s vice president of finance and its treasurer, a routine review of Penn’s financial position and debt capacity had revealed that Penn had borrowed substantially less than its peers at the top of the private-college pyramid in recent times.
“Compared to all the other schools,” Golding says, “we’ve actually paid down more debt than we’ve taken out” over the past 10 years.
That, along with the fact that interest rates were hitting historic lows at the beginning of 2012, signaled an opportunity.
“If you look at the yield curve, it’s very flat in terms of the differential between, say, a 30-year and a 100-year bond,” Golding explains. “And because that difference was small, we could lock in a very attractive rate for a very, very long period of time—so you wouldn’t have to worry about refinancing in 30 years.”
As the University approaches the end of its “Making History” capital campaign, which has already exceeded its overall goal of $3.5 billion, one might wonder why Penn would elect to borrow such a chunk. After all, even rock-bottom interest payments add up. (By the time Penn has to return the principal to bond holders in September 2112, it will have paid more than $4—in today’s dollars—for every $1 it borrowed.)
Golding says the deal made sense to University trustees for a couple of big reasons. For one, many observers—including Golding—believe that current rates will prove to be an aberration. For another, it was an opportunity for Penn to do something slightly atypical, which was to issue taxable debt instead of tax-exempt debt.
“Tax-exempt debt, although typically it comes in at lower interest rates, has lots of restrictions on it,” says Golding. “You can only use it for certain types of expenditures.
“Taxable debt, you can basically use for anything you want,” he continues. “One particular area of need that could not be satisfied through typical tax-exempt financing—and one that we had been trying to address for a long time—is deferred maintenance. Unlike a new building, which is attractive to potential donors, this is not something that donors are particularly enamored with.”
One of the University’s top priorities is modernizing the infrastructure of its old buildings. “We can put in new energy-efficient systems—heating, HVAC, electrical systems, lighting—that are much more economical,” Golding says. “We can actually generate savings that will help us cover the interest on the bonds.”
Century bonds occupy a very small niche in the financial marketplace, but activity has been heating up lately. The University of Southern California and MIT issued 100-year bonds last year, and the California Institute of Technology set the previous record for century-bond financing when it issued $350 million at a 4.744 percent interest rate in December.
Governments rarely issue bonds with such a long term, but Mexico sold $1 billion worth at a 6.1 percent rate in 2010. China, which had been the last nation to issue sovereign debt with a 100-year term, did so in 1996 with a 9 percent rate.
Penn did not, however, surpass what might be regarded as the bond market’s ultimate expression of confidence. In 1883, the Toronto, Grey and Bruce Railway convinced investors to accept a 4 percent rate for bonds that wouldn’t come due for 1,000 years. The Canadian line isn’t around anymore—its successor, Canadian Pacific, bought out those bonds with cash and stock in 1998—but you can still bid on one of the (worthless) original certificates on eBay.
Hopefully—for investors and scholars alike—the house that Ben Franklin built will show more perseverance.
—T.P.
